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Income Investing for Beginners - a 10 Part Guide to Successful Income Investing

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What Types of Investments Should I Hold in an Income Portfolio?
Money Tree

Think of each dollar you plant as the seed to your money tree. There are different types of trees (stocks, bonds, real estate) that have unique characteristics. You want to plant an orchard that can produce a constant stream of cash profits.

Getty Images, Doug Bowles
When you put together your income investing portfolio you are going to have three major "buckets" of potential investments. These are:

Dividend Paying Stocks: This includes both common stocks and preferred stocks. These companies mail checks for a portion of the profit to shareholders based on the number of shares they own. You want to choose companies that have safe dividend payout ratios, meaning they only distribute 40% to 50% of annual profit, reinvesting the rest back into the business to keep it growing. In today's market, a dividend yield of 4% to 6% is generally considered good.

Bonds: Your choices when it comes to bonds are vast. You can own government bonds, agency bonds, municipal bonds, savings bonds, and more. Whether you buy corporate or municipal bonds depends on your personal taxable equivalent yield. You shouldn't buy bonds with maturities of longer than 5-8 years because you face duration risk, which means the bonds can fluctuate wildly like stocks in response to changes in the Federal Reserve controlled interest rates.

Real Estate: You can own rental property outright or invest through REITs. Real estate has its own tax rules and some people are more comfortable with it because it naturally protects you against high inflation. Many income investing portfolios have a heavy real estate component because the tangible nature lets those living on an income investing portfolio drive by the property, see that it still exists, and reassure themselves that even if the market has fallen, they still own the deed. Psychologically, that can give them the needed peace of mind to hang on and stick to their financial plan during turbulent times.

Let's look at each category closer to get a better idea of appropriate investments for income investing portfolios.

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